Economic GROWTH has always been the key focus of many authorities and government. As with the environmental concerns, it is more crucial to consider Economic Growth & SUSTAINABILITY.
Economic growth is important because rapid growth in per capita real GDP can transform a poor nation into a wealthy one. Even a small differences in the growth rate of per capita GDP, can have a large impact on an economy’s standard of living if sustained over time. One should think of the growth rate of GDP as the equivalent of a rate of return on a portfolio. Small differences in return compounded over many years make a big difference. Nevertheless, there is a limit to how fast an economy can grow. Faster growth is not always better for an economy because there are costs associate with excess growth, such as higher inflation, potential environmental damage, at the lower consumption and higher savings needed to finance the growth.
This raises the issue of sustainable growth, which requires an understanding of the concept of potential GDP. Potential GDP measures the productive capacity of the economy and is the level of real GDP that an economy could produce if capital and labor are fully employed. In order to grow over time, an economy must add to its productive capacity. Thus, the sustainable rate of economic growth is measured by the rate of increase in the economy’s productive capacity or potential GDP. It is important to note that economists cannot directly measure potential output.
What do the economic growth & sustainability mean for global investors?
Being able to estimate the sustainable rate of economic growth for an economy is important for both asset allocation and security selection decisions. Investors need to understand how the rate of economic growth differs among countries and whether these growth rates are sustainable. When examining the GDP data, global investors need to address a number of questions, including the following:
1) What are the underlying determinants or sources of growth for the country?
2) Are these sources of growth likely to remain stable or change over time?
3) How can we measure and forecast sustainable growth for different countries?
Instead, they estimate it using a variety of techniques discussed later in this reading.